Comparing Alaska's Oil Production Taxes: Incentives and Assumptions

Abstract

In a recent analysis comparing the current oil production tax, More Alaska Production Act (MAPA, also known as SB 21) to the tax it replaced, Alaska’s Clear and Equitable Share (ACES), Scott Goldsmith, professor emeritus of economics at ISER, found that MAPA would produce higher revenues in the future, if changing to MAPA causes producers to make investments that lead to more production than would have occurred under ACES.2 Professor Goldsmith did not advocate for either tax, but projected effects of each under a range of different future oil prices, production rates, and costs. He noted that comparative revenues are highly sensitive to future costs and oil prices. Oil prices are notoriously difficult to forecast. Future North Slope oil production, as well as lease costs that can be deducted from producers’ tax liabilities under both ACES and MAPA, are also highly uncertain. Proponents of either MAPA or ACES appear to make assumptions about prices, production, and costs that support their arguments. Given the inherent uncertainty about oil prices, new production, and expenditures for capital and operating costs, what assumptions would be most reasonable to make for assessing outcomes of the tax regimes? This note critically examines the relevant assumptions for projecting tax outcomes, and explores how the different taxes compare under a set of assumptions that seem most reasonable, given our best current information. The comparisons address not only the amount of revenue the state would collect, but also how the taxes differently share risk between the industry and the state, and administrative issues affecting the nature of the relationship between the oil industry and state government. The analysis also places the debate about MAPA vs. ACES in the longer term context of Alaska oil production taxes, comparing MAPA and ACES to the original petroleum profits tax (PPT) that preceded ACES, and to the old severance tax PPT replaced.